Wednesday, July 5, 2017

Greece Has Eliminated Its Trade Deficit, But at a High Cost

by Colombe Ladreit de Lacharrière & Melina Kolb

Peterson Institute for International Economics

July 5, 2017

Greece has erased what used to be a very large current account deficit between 2007 and 2016. This would appear to be good news, but it is not. The reason is that the deficit was reduced by Greece cutting back on imports, not on boosting exports, a result of a dramatic drop in economic output.

A reduction of the trade deficit through a decrease in imports is usually welcome when high imports reflect an unsustainable boom. Greece's output gap, a measure of how much an economy is operating above or below its optimal level, was 8.9 percent in 2007 based on the latest data from the Organization for Economic Cooperation and Development (OECD). Ideally, Greece would have eased the output gap to zero percent and lowered imports in the process. Instead, economic output collapsed to a level far below potential, with the gap reaching –11.8 percent in 2016.


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